Republicans agree about wanting to cut taxes. They don’t agree on how to pay for it.

Trump’s push for tax cuts is coming up against a familiar challenge: Divided GOP

TOM BRENNER/NYT
President Donald Trump speaks during an event at the Loren Cook Company in Springfield, Mo., Aug. 30, 2017. Trump on Wednesday pitched a sweeping tax overhaul that he said would unleash the American economy and growth to help ordinary people, promising that a vague recipe of large corporate tax cuts and individual tax reductions would boost the middle class.

Posted: 10:15 a.m. Wednesday, September 13, 2017

WASHINGTON
—

White House officials trying to jump-start work on the GOP's top fall priority — tax cuts — are coming up against the same obstacle that has vexed President Donald Trump all year: divided Republican lawmakers.

Trump advisers and top congressional leaders, hoping to assuage conservatives hungry for details, are working urgently to assemble a framework that they hope to release next week, according to White House aides and lawmakers. But after months of negotiations, the thorniest disagreement remains in view: how to pay for the giant tax cuts Trump has promised.

Negotiators agree with the goal of slashing the corporate income tax rate and also cutting individual income taxes. But they have yet to agree about which tax breaks should be cut to pay for it all.

In private talks, Trump advisers are pressing to eliminate or reduce several popular tax deductions, including the interest companies pay on debt, state and local income taxes paid by families and individuals, and the hugely popular mortgage interest deduction.

Several officials from the White House and Capitol Hill confirmed that those options are being considered — and that they are pushing to release broad outlines in about a week.

But that is where the agreement ends. Congressional leaders, for instance, believe the mortgage deduction is too popular to cut, according to several officials familiar with the discussions.

All of it has forced negotiators to consider scaling back their vision. And that is before any plan has even been presented to the rank and file.

"It is always difficult, because it means what do you cut?" said Senate Finance Committee Chairman Orrin Hatch, R-Utah. "Everything on the books has a constituency, and that's one of the problems."

White House officials are still hopeful that they can lower the centerpiece of their effort, the corporate rate, from 35 percent to 15 percent. Many congressional Republicans, however, think that goal is ambitious.

House Speaker Paul Ryan, R-Wis., said at a forum hosted by the New York Times last week that individual deductions for mortgage interest, health insurance premiums and charitable donations should all be preserved. "We see those more as broad-based, important things that should be encouraged," he said.

That leaves negotiators with limited options to pay for the tax cuts they all seek.

Underlying the whole endeavor is the unresolved tension over whether it will constitute the sort of "tax reform" that Ryan has championed for years — an effort to reduce rates while maintaining federal revenue by eliminating "loopholes." A straight tax cut, meanwhile, could leave the loopholes intact but add trillions of dollars to the national debt.

Ryan and GOP allies have long promised "reform" in the spirit of the bipartisan 1986 rewrite of the tax code, which after three decades of revisions allows individuals and corporations to claim more than $1.6 trillion in tax breaks each year. But in recent months, key players have discussed something closer to the temporary, deficit-exploding tax cuts pushed by President George W. Bush in his first term.

"Just looking at all the promises that were made, you cannot do all those promises," said Mark Mazur, a former head of research, analysis and statistics at the Internal Revenue Service who was later the top tax official in the Obama administration. "Some things will have to get dialed back. They overpromised on a lot of things."

The process has taken on new urgency with Trump's recent exhortations to expedite what he has called the largest tax cut in U.S. history. He has traveled to Missouri and North Dakota in recent weeks to deliver speeches; in Missouri, he promised to reduce a "crushing tax burden on our companies and on our workers."

The White House and Republican leaders are trying a different approach than they used with the failed effort to repeal the Affordable Care Act, hoping for more agreement upfront rather than risk late defections that doom the entire process.

Marc Short, the White House legislative affairs director, said administration officials have met with "more than 250 members," including Democrats, to discuss tax reform.

"Our outreach has been extensive," he said.

National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin huddled with key GOP lawmakers on Capitol Hill on Tuesday afternoon to discuss next steps on the budget and taxes, according to Republicans familiar with the plans.

They discussed plans for a 2018 budget blueprint — a necessary first step before tax legislation can be taken up. And they drilled down with House and Senate negotiators on tax cuts.

Mnuchin also told a conference in New York on Tuesday that negotiators were still considering a number of unresolved issues. He said, for example, that they had not decided whether to cut tax rates for all 2017 income or just income in 2018 and beyond. He also said Republicans would assume that their tax cut plan would create hundreds of billions of dollars in new revenue just based on economic growth, an assertion that many budget experts have said is suspect.

Mnuchin also suggested Tuesday that companies could be treated differently under the GOP's tax proposal. He said, for example, that he favored charging a higher tax rate for accounting firms as opposed to manufacturing firms, which he says create jobs.

Later Tuesday, the president was scheduled to host a bipartisan dinner with three senior Republican members of the Senate Finance Committee and three conservative Democrats from states Trump won whose votes the president is courting for tax legislation.

Still, congressional GOP leaders are planning to use special budget procedures that would allow them to pass the tax bill with only Republican votes, skirting a potential filibuster from Senate Democrats. But they have made little progress in passing a key prerequisite, the budget blueprint, thanks to partisan infighting.

In the House, hard-line conservatives have demanded a more detailed tax plan before ponying up votes for a budget, which has created a chicken-and-egg problem for GOP leaders. In the Senate, the complication is a Budget Committee where Republicans have a single-vote majority, empowering any single GOP senator on the panel to negotiate the parameters of the tax bill.

House Freedom Caucus Chairman Mark Meadows, R-N.C., said it is "critically" important to have a better sense of what the emerging tax reform plan will look like before voting on a budget blueprint. He said he was hopeful about seeing more specifics "in the next couple of weeks."

There is also talk among some Republicans of what happens if GOP leaders are unable to work out their differences. One, who spoke on the condition of anonymity to speak candidly, speculated that the White House is lying in wait to cut a deal with Democrats if Ryan and Senate Majority Leader Mitch McConnell, R-Ky., are unable to pass a budget.

Democrats, meanwhile, have launched a campaign called "Not One Penny" aimed at pressuring Republicans to avoid sending more relief to corporations and the wealthy than to the middle and lower classes.

House Minority Leader Nancy Pelosi, D-Calif., said Tuesday that Democrats would be willing to discuss tax proposals with Republicans — just not the ideas that GOP leaders are currently discussing.

"Trickle-down economics is what they have out there," Pelosi said. "It has nothing to do with tax reform. It only has to do with their warmed-over stew."

A key element of Trump's blueprint would drastically reduce rates for businesses and individuals, changes that could eliminate more than $5 trillion in government revenue over 10 years. The president also wants to reduce the number of tax brackets for families and individuals from seven to three — and essentially to lower rates for these earners.

Complicating matters is the fact that two of the largest tax breaks eyed by the White House — eliminating the deduction for state and local taxes, and scaling back the mortgage interest deduction — have powerful interest groups that have made it more difficult for the GOP to coalesce around a plan.

Eliminating the state and local tax deduction would raise $700 billion in new taxes over 10 years, mostly from a handful of states including California, New York and New Jersey. On the mortgage interest deduction, negotiators are looking at lowering the mortgage cap that people can claim from $1 million to a level that would depend on average home prices in particular regions.

Despite Trump's goal of cutting the corporate tax rate to 15 percent, negotiators are looking at options that would lower it to around 23 percent, with a 28 percent rate for small businesses that file their taxes differently, said several individuals briefed on the discussions.

The White House has not proposed eliminating a specific corporate tax loophole to offset the rate cut.

Other goals under discussion include eliminating the estate tax and the alternative-minimum tax, and doubling the standard deduction that many Americans can claim when they file their taxes.

Tax experts believe it would be difficult if not impossible to follow through on all of these proposals without adding trillions of dollars to the national debt — even with the elimination of numerous tax breaks. Negotiators are considering making some of the tax changes permanent and allowing others to expire after several years to conform with Senate rules governing expanding the deficit.

Pushing legislation through without relying on Democrats for support would require them to use a budget mechanism known as reconciliation.

But reconciliation comes with a strict rule that any tax change must not increase the deficit after 10 years. Many budget experts believe Trump's current plan would violate the rule.

Republicans control just 52 of the 100 Senate seats, giving them a very slim margin that just three defections would imperil.

That margin makes Trump's goal of driving down the corporate tax rate as low as he can all the more challenging — and helps explain why negotiators are scrounging for ways to raise new revenue. The White House also is counting on a rosy estimate of how much future economic growth can be presumed.

Mnuchin has said the majority of the new tax revenue they plan to raise will come from economic growth, but House and Senate leaders have suggested that such inflated assumptions won't pass muster with the Joint Committee on Taxation, a congressional body that provides a crucial review of all tax proposal.

"Tax reform is hard and hasn't happened for 31 years for a reason," said Doug Holtz-Eakin, a Republican and former director of the Congressional Budget Office. "If you are doing tax reform through reconciliation, it's like doing tax reform on a tightrope. There's just not a lot of room for maneuvering."

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